Angel Tax Provision In Finance Bill Will Not Impact Startups: DPIIT Secretary

The Angel Tax provision in the Finance Bill will not impact startups, Anurag Jain, secretary in the Department for Promotion of Industry and Internal Trade (DPIIT), reiterated on Tuesday (February 21).

“Let me put one thing very clearly. It does not affect startups in the least,” Jain said while addressing the PE-VC industry at the IVCA Conclave 2023 in Mumbai. “…there is a clear proviso which clearly brings out that it does not affect the startups.”

As per Jain, startups recognised by the DPIIT are out of the purview of this proposal.

Angel Tax is the tax that unlisted startups are required to pay on the capital they raise through the issue of shares. It originated from Section 56(2) (VII B)  of the Income Tax Act, which was introduced in 2012 to put a check on money laundering practices. The provision was reintroduced in Finance Bill 2023, which led to severe debates in the startup and investor community.

Speaking about the concerns raised around Section 56(2) (VII B), Jain said that in the Section, the startup recognition process is very simple and straightforward. 

“As far as Section 56(2) (VII B) is concerned, anybody who applies gets it automatically. Therefore, that is something which should not bother the startup ecosystem,” he said. “There are other issues which we have received… we have forwarded to the Department of Revenue with our recommendations and, as I understand, they are taking some corrective actions.”

This is not the first time that Jain has said that the provision will not impact startups. Earlier this month, he said that Angel Tax will ensure a level playing field for domestic investors. 

“There is no Angel Tax on startups. Let me be clear. (Section) 56.2 (VII B) used to have two provisions. One was the preferential treatment of foreign players. Preferential treatment has been done away with. But for startups, there is no change,” he said then.

The renewed focus on Angel Tax comes at a time when startup funding in India has been declining – in 2022 it was down 40% to $25 Bn – amid a global funding crunch and economic downturn.

Speaking about the funding winter, Jain said that while there was a decline in funding raised by Indian startups in 2022 as compared to 2021, it was less pronounced than in countries like China and the US. 

“If we look at the data more closely, we find that in the Q1 of 2022, there were 64% more deals than in 2021. This means that had these global headwinds not happened, probably, 2022 could have been better. If you look at the long-term trend, take away 2021 as an outlier, even then 2022 is more than double of 2020 data,” Jain said.

Besides, he also stressed that India is set to become a $30 Tn economy by 2047.

“If we talk about where India would be in 2047, broadly, we would be a developed country,” he added.